What Social Banking Can Do

ERSTE Foundation has long promoted the development and expansion of social banking services to solve social challenges in Central and Eastern Europe. As the main shareholder of Erste Group, one of the largest banks in the region, we see this as one of our core competencies. Erste Group’s social banking clients are start-ups, small businesses, social organisations and low-income earners who usually do not have access to help from banks. We are therefore investing in the development of impact-centred financial products in Erste Social Finance Holding (ESFH), an impact investment company specialising in social banking that has evolved out of Erste Group.

In 2021 ERSTE Foundation participated in a capital increase in ESFH amounting to 940,000 euros. Franz Karl Prüller speaks with the managing director of ESFH, Peter Surek, about how the potential and performance of social banking offers have changed in recent years.

An example from Slovakia shows the dimensions that innovative and committed social banking can take on today. Alexandra Christandl reports on a project of Erste Group’s Slovakian subsidiary, Slovenská sporiteľňa (SLSP), that points the way for the entire region. In a time of rapidly rising housing costs, the Social Banking Department of SLSP, headed by Rasťo Blažej, along with ESFH, enables people to live in dignity according to the principle of “housing first”. In so doing, countries like Slovakia are testing the development of a market-financed system of affordable rental housing.

We can help social organisations to scale, to grow, to provide more impact

Franz Karl Prüller, Senior Adviser to the Board of ERSTE Foundation, in conversation with Peter Surek, Managing Director of Erste Social Finance Holding, about the character and potential of social banking.

Franz Karl Prüller: Looking back at 2021: what were the most important achievements of Erste Group’s Social Banking?

Peter Surek: The most important thing for us was that we could stand by our clients during these difficult Covid times. We provided more than 2,000 loans worth 40 million euros in 2021. Thanks to support from ERSTE Foundation, we were also able to provide special Covid emergency loans at zero interest rates to the non-profit sector. And we have increased our mentoring for clients in difficult financial situations. All this demonstrated that we are not only there in good times but also support our clients during bad times. Secondly, we were able to launch and scale significant new initiatives that are problem-oriented, impact-centred and require specially prepared financial solutions. We started impact projects focused on housing: in our company Dostupný Domov (“Affordable Home”) in Slovakia we now own approx. 70 apartments, which are being rented via NGOs to people in need (see page 48). In Austria we have also extended housing micro-loans (Kautionskredite) and continued the initiative for people in difficult housing situations by providing 200 apartments. In Hungary we achieved an interesting development with a social housing project, focusing on financing home improvements for people with very low incomes. In Serbia we were able to scale a new impact-oriented project called Nase Selo (“Our Village”), cooperating with a corporate client to help revive remote agricultural villages.

And finally we launched our Quasi Equity programme, providing mezzanine capital for growing social organisations and social infrastructure projects. This is our first small step in the direction of impact investing; we were able to realise the first two transactions of this product in 2021.

Looking at the last ten years: are you satisfied with the development of social banking services and products in Erste Group?

I am rarely fully satisfied as I am always striving for more, for better, but I admit that we get plenty of positive feedback from people involved in our initiatives: firstly and very importantly from our clients, who feel supported and taken seriously. We also had very positive reactions from organisations in the field of social finance or impact investing. And of course the very encouraging reaction of the European Commission in the form of personal praise directly from Commissioner Nicolas Schmit on the occasion of the launch of our Quasi Equity pro-

38,000 clients were supported by financial and / or educational measures

EUR 425 m of funding was provided

77,500 jobs were preserved or created in the region

58% of clients reported improvements in their economic situation despite the Covid-19 impact

48% of the start-ups we financed would not have been able to launch their businesses without our funding

79% of financed social organisations are better able to fulfil their social mission with our funding

457 people were able to find a new home within the social housing pilots

2 innovative financial instruments were launched: social impact bond and quasi equity

gramme. I think this is proof that we are on the right path. Looking back over the last ten years, we can see how we have helped to develop the market: there was no market for financing social organisations, for financing entrepreneurs in the initial stages, or for financing and supporting people in difficult economic or social situations. We have developed these markets together with our clients and at the same time we have shaped our bank. We can confidently say that currently all senior management is convinced that social banking really makes sense, that it can have an impact on societies with its solid business and financial model.

You have a lot of experience in and a large international network of social banking initiatives: where do you see good practice models that could be inspirational for further developing social banking in Erste Group?

On our peer level we see the big players like Micro Bank belonging to Caixa Group in Spain and the French savings banks or BNP Paribas, which also provide micro finance and impact finance. We are in touch with multiple microfinance companies and impact funds in the region and exchange views on different practices and experiences. Our advantage, compared to others, is that we have a very strong bank behind us, backing our activities with a robust regional presence and solid balance sheet. In contrast to many impact funds or microfinance companies we therefore don’t need to focus on raising money first and then deploying it: we have funding available from within Erste Group which we can deploy directly to our clients. The second big support and advantage is to have the backing of our largest shareholder, ERSTE Foundation, for various educational activities which the foundation is co-financing. The foundation is also helping us to design innovative schemes for financial and non-financial services, for example the interest-free loans during the Covid pandemic or the special guarantees scheme we are currently preparing for our clients.

From your experience, what are the main social and economic challenges the CEE region faces where social banking could provide a response with products and services?

When we started our social banking activities shortly after the financial crisis, the number one problem was very high unemployment rates, especially among young people. In the Balkan countries it stood at 40 per cent! This was where our activities started: focusing on micro finance and start-up finance for small enterprises so they could create jobs. Today we see fast-rising property prices as a significant challenge in society, as it is becoming a real problem for people with not only lower but also middle incomes to find affordable housing. In the last five years property prices in some of our markets increased by almost 100 per cent and despite low interest rates and slightly rising incomes, people have problems buying property. That’s why we started our social housing programme.

First, we supported people at the lowest income level who are excluded from decent housing and we are now developing a broader and bigger initiative to provide affordable housing in the region. The other issue concerns not only Eastern

Europe but also the West. We need high investments in social care in CEE because the burden of caring for older people can no longer be carried by families alone. We need institutionalisation and adequate support for this – here too, impact-oriented finance can play a significant role. The third topic is access to education. Many people can’t afford re-training or students cannot continue their studies, so we are exploring options for financial solutions for skills training and education.

Does social banking have to be banking? Or can you imagine other financial or nonfinancial services to address social needs in our societies?

When we talk about Erste Social Banking we are using our key competence as bankers to deliver the impact. Of course finance is only a small piece of the puzzle in finding solutions for the challenges in society. But the finance sector has the potential to empower organisations and individuals who have solutions to societal problems. With our financial products and financial intermediation we should and can help them to scale, to grow, to provide more impact. At the same time many of the organisations need non-financial support in training, capacity building and knowhow transfer, which we in social banking can also provide.

How do you see the collaboration of ERSTE Foundation and Erste Group in jointly creating services and products that can address social needs and challenges?

We are in a unique position within the whole social finance sphere in Europe, having both a solid bank and a strong foundation with its philanthropic impact and active shareholder role in the bank. This gives us opportunities to develop solutions which neither the bank nor the foundation would be able to deliver alone. We are talking about new instruments which are emerging under the term “blended finance”, where concessionary philanthropic capital can help to de-risk and thus unlock commercial capital for certain projects which cannot be financed purely by commercial means. Another instrument is guarantees which philanthropic or public institutions can provide for banks to be able to go into areas and take risks which they normally wouldn’t be able to tackle. We also combine educational activities with financing, which is our recipe for the very good results concerning non-performing loans in social banking: financial support should always be given in combination with training. So from the perspective of our unique institutional link, I am very optimistic that we can develop these solutions further and with them, really scale our joint impact.

Housing project in Slovakia helps vulnerable people find a new home

Alexandra Christandl

In partnership with the public sector and social organisations dealing with clients in difficult life situations, Slovenská Sporiteľňa (SLSP)’s Social Banking developed an innovative concept of affordable housing. Besides helping clients find a new home, the concept has received lots of public attention as SLSP is the first bank in Slovakia to issue a social bond to finance affordable housing.

In 2020 SLSP partnered with Slovak Investment Holding and SLSP Foundation to establish a company called Dostupný Domov (Slovak for “affordable home”), which buys scattered flats on the secondary and primary market. It then rents them out below market price to social organisations that care for vulnerable people without homes, offering those people both social assistance and affordable accommodation. This “housing first” approach integrates people without a home by providing them with a decent flat in a safe neighbourhood.

The focus is on offering affordable housing to disadvantaged and vulnerable people, such as abused mothers and their children, families at risk of losing their home and children from foster homes who have reached adulthood. To achieve this goal, SLSP’s Social Banking works with non-profit social organisations, foundations, and municipalities to determine the housing needs of those beneficiaries. They have already made 71 flats available.

“In Social Banking we develop solutions that deal with societal challenges in a financially sustainable way. At Dostupný Domov, we plan to reach a stock of around 1,500 flats within the next five years. We hope to achieve this with additional equity from Erste Social Finance Holding, Slovak Investment Holding and the social bond. This will enable us not only to buy suitable flats on the market, but also to participate in small real estate development projects,” says Rasťo Blažej, Head of Social Banking at SLSP.

Investing money for a good cause and a modest return

SLSP has issued social bonds worth nine million euros to finance affordable housing for socially disadvantaged people in Slovakia. Fortunately, social housing is a topic that is easy to explain, plus it involves low risk for investors. While the bond is primarily sold to private banking clients, it is also available to Slovakian retail clients via online banking. The bond’s nominal value starts at 1,000 euros, which puts it within reach for small investors.

Here are two short examples to show the impact this project is having. After giving birth to her second child, a young mother suffering from domestic abuse went from the maternity ward back to the crisis centre along with her newborn baby and five-year-old daughter. They were only supposed to be living there temporarily. Thanks to the affordable housing initiative, she got her own place, where the three of them moved in together. In another example, a 10-year-old boy and his mother, who had been living in shelter homes for several years, found a new place to live.

Find out more about the housing project at slsp.sk bit.ly/3xiaLoN

The flats in the affordable housing project in Slovakia are renovated and have basic furnishings, so you can move in immediately and feel at home. Photos: Dostupný Domov

“In the next five years we plan to reach a stock of around 1,500 flats.”

Rasťo Blažej, Head of Social Banking at Slovenská Sporiteľňa